WHITE MOUNTAINS INSURANCE GROUP LTD

The HG Global segment consists of HG Global and, prior to its deconsolidation on July 1, 2024, the consolidated results of Build America Mutual Assurance Company (“BAM”). See Note 2 — “Significant Transactions” on page F-19.

HG Global was established to fund the startup of BAM and provide reinsurance protection to BAM’s municipal bond insured portfolio. HG Global, together with its subsidiaries, funded the initial capitalization of BAM through the purchase of $503 million of surplus notes issued by BAM (the “BAM Surplus Notes”). HG Global, through its reinsurance subsidiary, HG Re, is a party to a first-loss reinsurance treaty (“FLRT”) with BAM, under which HG Re provides first-loss protection of up to 15%-of-par outstanding for each policy assumed from BAM. HG Re is only licensed to provide reinsurance to BAM. HG Re is required to provide reinsurance on policies that fall within the FLRT underwriting guidelines agreed upon by HG Re.

BAM is the first and only mutual municipal bond insurance company in the United States. By insuring the timely payment of principal and interest on municipal bonds, BAM provides market access to, and lowers interest expense for, issuers of municipal bonds used to finance essential public purpose projects. As a mutual insurance company, BAM is owned by and operated for the benefit of its members, the municipalities whose debt issuances are insured by BAM. BAM is domiciled in New York and is regulated by the New York State Department of Financial Services (“NYDFS”).

White Mountains does not have an ownership interest in BAM. However, through June 30, 2024, White Mountains was required to consolidate BAM’s results in its financial statements because BAM is a variable interest entity (“VIE”) for which White Mountains was the primary beneficiary. BAM’s results were all attributed to noncontrolling interests. On July 1, 2024, HG Re and BAM amended the FLRT with respect to certain governance rights held by HG Re. As a result, and in combination with other governance changes at BAM, White Mountains concluded that it no longer has the power to direct BAM’s activities that most significantly impact its economic performance and is no longer BAM’s primary beneficiary. Accordingly, as of July 1, 2024, White Mountains no longer consolidates BAM. Through June 30, 2024, BAM’s assets, liabilities and noncontrolling interests, as well as its results of operations, are presented within the HG Global segment. See Note 2 — “Significant Transactions” on page F-19.

HG Global has two primary sources of cash flows: (i) interest payments on the BAM Surplus Notes that are made outside the Collateral Trusts and (ii) releases of excess balances from the Collateral Trusts. See“Collateral Trusts” on page 12.

As of December 31, 2024 and 2023, White Mountains reported $1,179 million and $1,221 million of total assets and $253 million and $376 million of total equity related to HG Global. HG Global’s total equity attributable to White Mountains’s common shareholders after intercompany eliminations related to preferred dividends payable to White Mountains and intercompany debt was $729 million and $779 million as of December 31, 2024 and 2023. As of December 31, 2024 and 2023, White Mountains owned 96.9% of HG Global’s preferred equity and 88.4% of its common equity. As of December 31, 2024 and 2023, White Mountains reported $(13) million and $1 million of noncontrolling interests related to HG Global.

As of December 31, 2023, White Mountains reported $530 million of total assets and $(140) million of noncontrolling interests related to BAM, prior to its deconsolidation on July 1, 2024.

Reinsurance Treaties

HG Global provides reinsurance exclusively to BAM. Through the reinsurance relationship with BAM, HG Global maintains a direct dialogue and line of sight into key operations, including the application of both BAM’s underwriting guidelines and the FLRT underwriting guidelines, continuous portfolio monitoring, credit surveillance and claims paying resources.

HG Global reinsures all BAM policies that meet the FLRT underwriting guidelines. This has resulted in a portfolio with a focus on prudent single risk limits for small-to-medium sized, public investment grade municipal bonds in the U.S. (primarily in the AA, A and BBB categories in low-risk, stable sectors) that are issued to finance essential public purpose projects, such as schools, utilities and transportation facilities. White Mountains believes that municipal bonds insured by BAM have strong appeal to retail investors, who buy smaller, less liquid issuances, have less portfolio diversification and have fewer credit differentiation skills and analytical resources than institutional investors.

HG Re, through its reinsurance treaties with BAM, is exposed to climate-related events to the extent that those events impact a municipal issuer’s ability to service its debt obligations. Under the FLRT underwriting guidelines, BAM incorporates climate change risk in its credit underwriting process. In doing so, BAM considers both the short-term economic impact from climate change-related severe weather events (including flooding, wildfires, drought, windstorms and tornadoes), as well as longer-term impacts on population and property values from rising sea levels and changing temperature patterns.

FLRT

Under the FLRT, HG Re provides first-loss reinsurance protection of up to 15%-of-par outstanding for each policy assumed from BAM. For capital appreciation bonds, par is adjusted to the estimated equivalent par value for current interest paying bonds. HG Re is required to provide reinsurance on policies that fall within the FLRT underwriting guidelines agreed upon by HG Re.

BAM charges an insurance premium on each municipal bond insurance policy it underwrites. Historically, approximately 55% of the total insurance premium charged by BAM has been a member surplus contribution (“MSC”), and the remainder is a risk premium. In return for the reinsurance provided, HG Re receives approximately 60% of the risk premium charged, which is net of a ceding commission.

The FLRT is a perpetual agreement with terms that can be renegotiated every five years. For the next renegotiation period, either party may provide notice during 2028 to trigger a renegotiation that would take effect on January 1, 2030. If the parties are unable to mutually agree to amended terms, the dispute is resolved through arbitration, according to certain principles agreed to by the parties. Amended contract terms must be approved by the NYDFS. Should BAM consider the amended terms unacceptable, it has the option to purchase HG Re or cause another reinsurer to purchase HG Re, at fair value.

In addition, the FLRT provides HG Holdings Ltd., a subsidiary of HG Global, the right to designate two directors for election to BAM’s Board of Directors.

Prior to the deconsolidation of BAM on July 1, 2024, HG Re’s reinsurance balances under the FLRT eliminated in White Mountains’s consolidated financial statements. Subsequent to the deconsolidation, White Mountains recognized gross written premiums of $32 million and earned premiums of $15 million during the year ended December 31, 2024.

XOLT

HG Re is also party to an excess of loss reinsurance agreement (the “XOLT”) with BAM. Under the XOLT, HG Re provides last-dollar protection for exposures on municipal bonds insured by BAM in excess of the NYDFS single issuer limits. As of December 31, 2024, the XOLT is subject to an aggregate limit equal to the lesser of $125 million or the assets held in the supplemental collateral trust (the “Supplemental Trust”) at any point in time. The XOLT is accounted for using deposit accounting, and any related financing revenues are recorded in other revenues, as the agreement does not meet the risk transfer requirements necessary to be accounted for as reinsurance.

Prior to the deconsolidation of BAM on July 1, 2024, HG Re’s reinsurance balances under the XOLT eliminated in White Mountains’s consolidated financial statements. Subsequent to the deconsolidation, other revenues recognized by White Mountains during the year ended December 31, 2024 related to the XOLT were insignificant.

Collateral Trusts

HG Re’s obligations under the FLRT are subject to an aggregate limit equal to the assets in two collateral trusts, the Supplemental Trust and the Regulation 114 Trust (together, the “Collateral Trusts”), at any point in time.

On a monthly basis, BAM deposits cash equal to ceded premiums net of ceding commissions, due to HG Re under the FLRT directly into the Regulation 114 Trust. The Regulation 114 Trust target balance is equal to HG Re’s unearned premiums and unpaid loss and LAE reserves, if any. If, at the end of any quarter, the Regulation 114 Trust balance is below the target balance, funds will be withdrawn from the Supplemental Trust and deposited into the Regulation 114 Trust in an amount equal to the shortfall. If, at the end of any quarter, the Regulation 114 Trust balance is above 102% of the target balance, funds will be withdrawn from the Regulation 114 Trust and deposited into the Supplemental Trust. The Regulation 114 Trust balance as of December 31, 2024 and 2023 was $352 million and $342 million, which consisted of cash, investments and accrued investment income.

The Supplemental Trust target balance is $603 million, less the amount of cash and securities in the Regulation 114 Trust in excess of its target balance (the “Supplemental Trust Target Balance”). If, at the end of any quarter, the Supplemental Trust balance exceeds the Supplemental Trust Target Balance, such excess may be distributed to HG Re. The distribution will be made first as an assignment of accrued interest on the BAM Surplus Notes and second in cash and/or fixed income securities. For the year ended December 31, 2024, HG Re received a distribution out of the Supplemental Trust of $80 million, which was comprised of the assignment of $59 million of accrued interest on the BAM Surplus Notes and a cash distribution of $21 million. For the year ended December 31, 2023, HG Re did not receive any distributions out of the Supplemental Trust.

As the BAM Surplus Notes are repaid over time, the BAM Surplus Notes will be replaced in the Supplemental Trust by cash and fixed income securities. The Supplemental Trust balance as of December 31, 2024 and 2023 was $598 million and $607 million, which included $289 million and $247 million of cash, investments and accrued investment income, $301 million and $322 million of BAM Surplus Notes at nominal value and $8 million and $38 million of accrued interest receivable on the BAM Surplus Notes at nominal value.

As of December 31, 2024 and 2023, the Collateral Trusts held total assets of $950 million and $949 million.

Through June 30, 2024, the interest rate on the BAM Surplus Notes was a variable rate equal to the one-year U.S. Treasury rate plus 300 basis points, set annually, with each payment applied pro rata between outstanding principal and interest. Accordingly, in 2024, the interest rate on the BAM Surplus Notes was 8.2% through June 30, 2024. Effective July 1, 2024 and through maturity, HG Global and BAM amended the interest rate on the BAM Surplus Notes to be 10.0%, with a higher proportion of each payment to be applied to outstanding principal.

Under its agreements with HG Global, BAM is required to seek regulatory approval to pay principal and interest on the BAM Surplus Notes only to the extent that its remaining qualified statutory capital and other capital resources continue to support its outstanding obligations, its business plan and its “AA/stable” rating from Standard & Poor’s. No payment of principal or interest on the BAM Surplus Notes may be made without the approval of the NYDFS.

During 2024, HG Global received cash payments of principal and interest on the BAM Surplus Notes totaling $30 million. Of these payments, $21 million was a repayment of principal held in the Supplemental Trust, $1 million was a payment of accrued interest held in the Supplemental Trust and $8 million was a payment of accrued interest held outside the Supplemental Trust.

During 2023, HG Global received a cash payment of principal and interest on the BAM Surplus Notes of $27 million. Of this payment, $18 million was a repayment of principal held in the Supplemental Trust, $2 million was a payment of accrued interest held in the Supplemental Trust and $7 million was a payment of accrued interest held outside the Supplemental Trust.

During 2022, HG Global received a cash payment of principal and interest on the BAM Surplus Notes of $36 million. Of this payment, $25 million was a repayment of principal held in the Supplemental Trust, $1 million was a payment of accrued interest held in the Supplemental Trust and $10 million was a payment of accrued interest held outside the Supplemental Trust.

As of December 31, 2024 and 2023, the principal balance on the BAM Surplus Notes was $301 million and $322 million and total interest receivable on the BAM Surplus Notes was $195 million and $175 million, all at nominal value.

Prior to the deconsolidation of BAM on July 1, 2024, the BAM Surplus Notes, including accrued interest receivable, were classified as intercompany notes carried at nominal value, which eliminated in consolidation. Upon deconsolidation, White Mountains elected the fair value option for the BAM Surplus Notes. As of July 1, 2024 and December 31, 2024, the fair value of the BAM Surplus Notes was $387 million and $382 million. See“BAM Surplus Notes” under“CRITICAL ACCOUNTING ESTIMATES — Fair Value Measurements” on page 82.

Competition/Pricing

Certain sectors of the municipal bond insurance industry are highly competitive. HG Re is only licensed to provide reinsurance to BAM. Accordingly, HG Re, through its reinsurance treaties with BAM, is indirectly exposed to this competition.

BAM’s primary competitor is Assured Guaranty Ltd. (“Assured”). BAM and Assured each seek to differentiate themselves through risk selection, financial strength ratings, claims paying resources and underwriting strategies. BAM believes it has a number of distinct competitive advantages, and that, over time, its mutual structure will deliver a cost of capital advantage relative to its stock company competitor.

Pricing (i.e., premium level) is affected by a number of factors, including interest rate levels, credit spreads, trading value and capture rate (i.e., the percentage of total interest savings captured in the form of insurance premium). All else being equal, pricing is generally higher when interest rates are higher, credit spreads are wider, BAM’s trading value is higher relative to competitors and the capture rate is higher.

Insured Portfolio

Under the FLRT, HG Re provides first-loss reinsurance protection of up to 15%-of-par outstanding for each policy assumed from BAM. For capital appreciation bonds, par is adjusted to the estimated equivalent par value for current interest paying bonds. Prior to the deconsolidation of BAM on July 1, 2024, HG Re’s reinsurance balances under the FLRT eliminated in White Mountains’s consolidated financial statements. See Note 2 — “Significant Transactions” on page F-19.

The following table presents HG Re’s insured portfolio by asset class as of December 31, 2024 and 2023:

(1) The weighted average credit ratings are based on Standard & Poor’s credit ratings, or if unrated by Standard & Poor’s, the Standard & Poor’s equivalent of credit ratings provided by Moody’s Investor Service (“Moody’s”). HG Re’s weighted average credit rating is calculated using its outstanding par value of policies assumed.

The following tables present HG Re’s ten largest exposures based upon the par value of policies assumed as of December 31, 2024 and 2023:

(1)The credit ratings are based on Standard & Poor’s credit ratings, or if unrated by Standard & Poor’s, the Standard & Poor’s equivalent of credit ratings provided by Moody’s. “AA-” is the fourth highest, “A+” is the fifth highest, “A” is the sixth highest and “A-” is the seventh highest of 23 credit ratings assigned by Standard & Poor’s.

(1)The credit ratings are based on Standard & Poor’s credit ratings, or if unrated by Standard & Poor’s, the Standard & Poor’s equivalent of credit ratings provided by Moody’s. “AA-” is the fourth highest, “A+” is the fifth highest, “A” is the sixth highest and “A-” is the seventh highest of 23 credit ratings assigned by Standard & Poor’s.

The following tables present the geographic distribution of HG Re’s insured portfolio as of December 31, 2024 and 2023:

The following table presents HG Re’s insured portfolio by issuer size of exposure as of December 31, 2024 and 2023:

(1)The original par value of policies assumed per issuer does not include refunded and re-issued deals.

Insured Credit Surveillance

HG Re attends BAM’s monthly surveillance committee meetings. The surveillance committee evaluates the credit profile of each insured municipal bond on a periodic basis and places each insured municipal bond into one of four surveillance categories, the last two of which represent insured municipal bonds that are on BAM’s insured credit watchlist. Surveillance category 3 represents insured municipal bonds whose issuers are experiencing financial, legal or administrative issues causing overall credit quality deterioration, but whose probability of generating an insured loss is considered remote. Surveillance category 4 represents insured municipal bonds where a loss is expected or losses have been paid and have not been recovered or are not recoverable. As of December 31, 2024, BAM had assigned two credits to surveillance category 3 and did not assign any credits to surveillance category 4.

Insured municipal bonds on the watchlist are monitored closely and are subject to BAM’s distressed credit management procedures, including a remediation plan developed in consultation with BAM’s legal counsel and consultants and HG Re. The objectives of any remediation plan are to address the problems the issuer is facing, to address any external factors impacting the credit, to ensure that creditors’ rights are enforced and to cure any breaches that may have occurred with respect to any credit triggers or covenants. BAM may work with other insurers, municipal bondholders and/or interested parties on remediation efforts, as applicable.